Growth rates

PuzzledDave

Whilst I've been contributing to a pension for a number of years and monitored closely it's growth, it's only now occured to me that I don't really understand growth rates.

Sure you get projections based on the standard 5, 7 & 9 per cent ( perhaps now 2, 4 & 8 I believe )... but that seems to me to make little sense. For example:

In 2011 I am a low paid worker and have saved just £5,000 into my pension total over 10 years. In 2012 I get a much better job and contribute £5000 in that year alone and gain £350 in returns from the funds performance. Is that growth of 7% (£350 of the £5,000 I started the year with i.e. ignoring contributions) or can I boast of a massive 207% growth in my pension ?

As it seems to me since my payments in to the fund make growth calculations meaningless in the early years since they likely to increase the fund way beyond 5,7,9 % and in the later years be such a tiny proportion of the fund as a whole that if contributions are supposed to be included in the yearly 'growth', any growth will surely seem stunted to previous years.

SuperAllyB

Not sure exactly how to work it out but new payments most definitely aren't included in growth calculations.

sandsy

Projections only take into account regular payments that you've contracted to make. They can't possibly take account of ad hoc additional payments.

mania112

Exactly right, projections are largely meaningless.

First off, they assume growth rates of 5/7/9% (at the mo). No fund will grow by 5% pa for the rest of the term. Never.... even though it is theoretically possible, it will never happen.

Next, as you say you would have to know what you're contributing from the outset for it to be accurate.

The main use for projections is to compare your projections to another provider to see which has lower charges (if projections are the same and the maturity values are different, this must be due to the affect of charges).

Other than it they're pretty much finger in the air calculations...

somethingcorporate

Not sure where you got 207% from.

Assuming the base is £10k starting position the most it has "grown" in an absolute sense of the word is the additional £5k payments and £350 organic growth so 53.5%.

Linton

The quoted 5-9% returns refer to the possible investment growth (just like in a bank savings account) and are nothing to do with your contributions. The estimated pension pot at retirement will take into account both your contributions and the investment return. Your are correct in believing that in the very early years the investment return is small compared with the contributions. However it soon becomes very important.

In your example the return is 7%. Though the figures are not quite accurate as you start gaining the 7% annual equivalent for each monthly contribution as soon as it is paid.

ozzage

If you have a record of all of your contributions over time plus the current value of your pot, you can use Excel and the XIRR function to find what your actual growth (per annum) has been.

In my mind this is the only way to compare how you've gone against the projections. It'll give you a percentage growth figure which can be compared directly against the projections (or against the performance of a particular fund, the FTSE etc)

http://www.oldschoolvalue.com/blog/investment-tools/calculate-xirr-annualized-returns/